The euro needs crises

The euro is a strange beast as it is effectively a stateless currency backed by a union of sovereign countries. The markets were given a sharp reminder of that weakness at the beginning of the week as political problems once again flared up in the Eurozone's periphery. But such eruptions have actually proved beneficial for the single currency over the long-term.

To see that you only need look back to the summer of last year when the European Central Bank, actually started behaving more like a proper central bank when it declared it would do whatever it takes to save the euro – a rally quickly followed. This is typical of the union's history; its integration is driven by crises and it's ultimately what markets want if they are to have faith that the euro will still be around a decade from now.

Therefore the momentum behind that integration is likely to require further crises. On Monday, Spain and Italy delivered another round of uncertainty to markets with their domestic politics threatening to derail economic reforms, which briefly put the euro under pressure. When these events morph into existential threats to the euro, that tends to be the moment policy makers come together and act boldly.

EUR/USD chart

If policy makers can address that weakness, which will be done through Eurozone integration and stimulating the region's economic growth, then the single currencies has a number of strong fundamentals backing it.

The Eurozone has a healthy current account surplus, which rose to €12.6 billion in November from €10.2 billion in October.

About the Author

Justin Pugsley is the forex and gold markets analyst for New Zealand-based trading platform provider MahiFX. He is a keen student of markets, economics and history. Prior to working with MahiFX, Justin worked for a number of leading media organisations such as Thomson-Reuters and Dow Jones/Wall Street Journal.